Work

Closing a Mental Account: The Realization Effect for Gains and Losses

Year: 2018

Type: article

Abstract: How do risk attitudes change after experiencing gains or losses? For the case of losses, Imas (Am Econ Rev 106:2086–2109, 2016) shows that subsequent risk-taking behavior depends on whether these losses have been realized or not. After a realized loss, individuals’ risk-taking decreases, whereas it increases after an unrealized (paper) loss. He refers to this asymmetry as the realization effect. In this study, we derive theoretical predictions for risk-taking after paper and realized gains, and for investment opportunities with different skewness. We experimentally test these predictions and, at the same time, replicate Imas’ original study. Independent of a prior gain or loss, we show that subsequent risk-taking is higher when outcomes remain unrealized. However, we find no evidence of a realization effect for non-positively skewed lotteries. While the first result suggests that the effect is more general, the second result reveals its boundary conditions.

Source: Experimental Economics

DOI: 10.1007/s10683-020-09663-x

Authors: Christoph Merkle, Jan Müller-Dethard, Martin Weber

Institutions: Aarhus University, University of Mannheim, Centre for Economic Policy Research

Language: English

Topic: Decision-Making and Behavioral Economics

Subfield: General Decision Sciences

Field: Decision Sciences

Domain: Social Sciences

Open Access status: hybrid

Estimated APC paid: $3,550

Funders: Universität Basel, Deutsche Forschungsgemeinschaft, Universität Mannheim